The Importance of Manufacturing and its Relationship to Tapering

The markets have been all gaga about the recent data coming out of America's manufacturing sector.  The Federal Reserve's data release showed that factory production climbed and that capacity utilization (the amount that a factory is in use) increased to levels not seen since June 2008.  Capacity growth rose by 1.8 percentage points on a year-over-year basis, hitting 79 percent in November 2013.  While this is definitely an improvement over the 2009 low of 66.9 percent, is is not particularly outstanding when taken into historical perspective as shown here:

Capacity is still nearly 1.5 percentage points lower than it was between February 2007 and February 2008 and is well below the 83 percent plus range experienced between 1994 and 1998.  It is particularly mediocre when compared to the 87 percent plus range seen in the late 1960s and early to mid-1970s when America was a manufacturing behemoth.  As well, the current capacity utilization is still down 1.2 percentage points from the 1972 to 2012 average of 80.2 percent and is just above the 78.8 percent nadir experienced during and after the 1991 - 1992 recession.

While some "experts" are touting this newfound growth in manufacturing as a harbinger of good things to come from the Federal Reserve, as you can see on this chart, manufacturing is a far less important part of the American economy than just about any time in the last forty years:

In 1970, manufacturing in the United States made up 24.3 percent of the total economy and fell to 12 percent in 2011.  This follows a global trend that has seen the world's manufacturing share of GDP in advanced nations fall from 26.6 percent in 1970 to 16.2 percent in 2010.

The United States Chamber of Commerce seems to feel that this is a good thing and that it merely reflects the shift from a manufacturing intensive "Machine Age" economy to a modern, service-intensive "Information Age" economy.  A study from the Information Technology and Innovation Foundation (ITIF) suggests otherwise.  

The authors of the ITIF study show that between 2000 and 2010, America lost 5.7 million manufacturing jobs or 33.1 percent of the total.  These manufacturing job losses compare to the loss of 30.9 percent of manufacturing jobs between 1929 and 1933.  Here is a graph showing the percentage of job losses for each industrial group within the manufacturing sector between 200 and 2010:

The percentage of jobs lost in the manufacturing sector during the latest recession were the worst since the Second World War as shown on this graph:

Here is a map showing the percentage loss in manufacturing jobs by state for the period from 2000 to 2010:

As well, while the overall change in real manufacturing value-added appears to be growing relative to GDP as shown here:

...many industries are showing output declines with 13 of the 19 sectors that employ 55 percent of manufacturing employees producing less in 2010 than they were in 2000.  Largely, the authors feel that output growth in both the computer and electronic and the petroleum and coal sector being overstated, making the manufacturing sector appear much healthier than it is.

The authors note that, while productivity increases were partially responsible for declining employment in the manufacturing sector, the overriding factor was the decline in output.  If manufacturing output had grown by the same rate as the rest of the business sector between 2000 and 2010, the United States would have 3.8 million more manufacturing jobs than it currently does.

Here is a graph showing the percentage change in manufacturing real value by industrial group for the period from 2000 to 2010:

Notice that the lion's share of growth is in two sectors, petroleum/coal and computer and electronic products with most other sectors showing contraction.  That can hardly be termed "economic balance".  

Now, if we wonder why the manufacturing sector in the United States is failing, here is a graph that may give us the answer:

Perhaps that explains why China now finds that manufacturing now makes up 33.5 percent of its GDP compared to 22 percent in 1970.

I am hoping that all of this data will make you realize that when you read headlines stating that the "health" of the manufacturing sector in the United States is much improved and that this factor will have an impact on tapering, that you will be able to see that, despite the Federal Reserve's intervention since 2008, this once key sector of the economy is on life support and is, unfortunately, relatively unimportant in the grand scheme of what the Fed has planned for the future.